When we think of employment income, our minds often jump straight to our annual salary. But in the eyes of the Inland Revenue Board of Malaysia (LHDN), employment benefits are also considered part of your income, especially when a monetary value can be assigned to them (which is frequently the case!).
Navigating this aspect of employment income can be quite complex, involving various provisions of the Income Tax Act (ITA). It's so intricate that some employers choose not to declare these benefits, and employees often accept whatever figures appear on their Form EA.
However, it doesn't have to be this way! In this blog, we'll delve into the calculation of these employment benefits for employees and explore how employers can claim tax deductions for these expenses. Our primary focus will be on gifts received as part of employment.
Exemptions
Before we go in-depth into the topic, it's essential to grasp which provisions are being covered. Two categories stand out:
Benefit in Kind (BIK) and perquisites. Perquisites encompass non-cash gifts that can be converted into cash, such as cash vouchers, paid bills, and even high-value items like cars or watches.
Some of the BIKs & perquisites are specifically listed as exempt for employees. This means the benefit will not show in the Form EA, as the associated benefit will be listed as 0.
However, employers should still maintain records of these benefits for their employees.
Certain types of pure gifts or testimonials unrelated to employment, when given by an employer to an employee, are exempted from taxation. These exemptions cover:
Wedding Gifts: Gifts presented to employees on the occasion of their wedding.
Gifts for Outstanding Professional Achievements: This includes gifts given to employees who have excelled in professional examinations, achieving excellent results.
Company Samples: Samples of company products or merchandise provided to employees.
Gifts of Mobile Phones: Employees can receive gifts of mobile phones, with the exemption limited to one phone per year.
Long-service awards (for employees with over 10 years of service) or awards for excellent service receive an RM2,000 exemption (once during the entire employment period)
It's important to note that these exemptions apply unless the employee in question holds a position of control within the employer's organization. This includes individuals like managing directors, partners in a partnership, or sole proprietors who pay themselves. In such cases, these exemptions do not apply, and the gifts may be subject to taxation.
Taxable gifts
For those gifts that are not given exemptions, employees will be taxed for the benefit received. Most gifts should be classified as perquisites, as the gift item most likely has a monetary value attached to it. The calculation is simply the cost of the gift to the employer.
If the employee pays for the gift, regardless of how much the payment is, the benefit amount will be reduced by that amount.
Let's take a real-life scenario to understand how the taxation of gifts works. Meet Jimmy, a dedicated employee who has served his company faithfully for 14 years. In recognition of his long service, his employer decided to reward him with a cash gift of RM3,000 as a long-service award.
Now, the good news for Jimmy is that he won't be taxed on the entire RM3,000. The tax authorities grant an exemption of RM2,000 specifically for long-service awards like this one. This means that Jimmy will only be taxed on the remaining RM1,000.
When it's time for his employer to issue Form EA, this RM1,000 will be included as part of Jimmy's taxable income. This example highlights how exemptions work in practice and how the taxable amount is determined for such gifts.
Tax Deductions for Employers
For employers, it's essential to record expenses related to employee benefits in their financial records. In most cases, these expenses are eligible for tax deductions. However, there is an exception to this rule. If the gifts are given purely for personal appreciation or for specific personal reasons not related to employment. Then the gift given was not tax deductible for the employer and needed to be added back into the tax computation. However, it is also not taxable in the hands of employees.
Likewise, for the case of a long service award, the employer will enjoy the tax deduction as the long service award was given in relation to the employment. In the case of Jimmy, the employee will get a M2,000 tax exemption whereas the employer will get RM3,000 tax deductions.
Conclusion: Understanding Employee Gift Taxation
In the complex world of taxation, it's reassuring to know that employees and employers alike enjoy certain exemptions and benefits when it comes to gifts from employment. When we sift through the details, we find that employees are granted a multitude of exemptions, allowing them to exclude common gifts from employment, often given as tokens of personal appreciation.
Employers also benefit from this system. The tax authorities recognize that these expenses are essential for maintaining high staff morale and a positive working environment. Consequently, employers are generously provided with tax deductions for these expenses, which can help ease their tax burden.
In essence, while the world of taxation may seem intricate, these provisions make navigating the tax treatment of employment gifts a bit more straightforward for everyone involved. It's a win-win scenario that encourages both employers and employees to recognize and appreciate each other's contributions.
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References
LHDN Public Ruling No. 5/2019 (Perquisites from Employment): http://lampiran1.hasil.gov.my/pdf/pdfam/PR_05_2019.pdf
LHDN Public Ruling No. 4/2015 (Entertainment Expense): https://phl.hasil.gov.my/pdf/pdfam/PR_4_2015.pdf
LHDN Public Ruling No. 11/2019 (Benefit in Kind): https://phl.hasil.gov.my/pdf/pdfam/PR_11_2019.pdf